Build or buy? How banks can make the right choice

Banks often face a conundrum when they look to modernize their tech stacks: Should they build capabilities internally or buy a given tech solution? It’s a decision that needs to be weighed carefully because it’s one that the institution will have to live with for a very long time. The implications can be significant, and the right answer varies from situation to situation. 

Before choosing which direction to take a new project, banks must consider multiple factors, including internal capacity and expertise, data governance and compliance, scalability, competitive advantage, ongoing maintenance and evolution, and adaptability to future use cases.

Start by Evaluating IT Capacity and Capability

Internal momentum toward building rather than buying can be sparked by many factors. For example, most banks have spent the last decade building technical expertise around their core banking functions. Their IT teams have good processes in place for managing internal software builds and might be hungry for challenging, creative tech projects. 

But at the same time, a bank isn’t Amazon or Google. The best fintechs can innovate in ways that may not be possible for a highly regulated, legacy financial institution to replicate internally. Banks’ IT teams also have limited time and resources to execute ambitious builds outside their core expertise. On average, only 10% of banks’ IT capacity is available for projects that generate business value. The vast majority is taken up with administrative and maintenance tasks.

So, most banks will probably end up buying more third-party vendor solutions than they build. But which ones?

Some Capabilities are More Buildable than Others

The question of whether to build vs. buy also hinges on the capability or solution in question. For instance, one factor to consider is whether the capability relates to the bank’s core expertise.

Outsourcing a core banking function to a vendor could erode competitive advantage or put sensitive financial data at risk. Banks’ IT teams  have extensive experience with these capabilities. In these cases, it probably makes sense to invest time and resources into building a proprietary in-house solution.

By contrast, third-party solutions that touch on aspects of customer experience, such as the mobile app interface or customer engagement platforms, are less likely to raise concerns about data security or competitive advantage. These capabilities are also likely to exist further outside of banks’ IT teams’ expertise, which makes them more difficult and time-consuming to build internally. In these cases, buying may be the right answer.

Most scenarios fall into a gray area between these two examples. But there are also a plethora of other factors to consider, including how the capability needs to scale, how soon it needs to launch, and how much budget is available. Sussing out the nuances of each situation across many different dimensions is key to making the right call on whether to build or buy. 

Much is at Stake in the Decision to Build or Buy

It can be difficult to weigh all of these factors for every new technological capability a bank needs. And the stakes are high. When a bank builds a solution it should buy, it may waste IT time and resources on a product that doesn’t perform as well as third-party solutions on the market. On the other hand, if the bank buys when it should build, it could introduce complex compliance concerns or create extensive customization requirements that erode the advantages of buying in terms of time and cost.

Banks need to think about the long-term plan when deciding whether to buy or build, including the resources required for ongoing maintenance and the expertise needed for innovative evolution. By thinking through each requirement methodically and carefully, your bank can make the right choices for its tech stack — and its future.

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